The UK Mortgage Industry

Chris Boyle 

Supply and Demand

A free market is regulated by supply and demand. Demand describes how much of a product or service consumers want to buy, and supply describes the amount businesses will supply consumers. The demand for a product or service is influenced by consumer tastes, the price, the price of substitutes and compliments, consumers' real income and the size of the population.

The law of demand states that if the price of a product or service falls its demand will increase providing all other factors remain unchanged.

The supply of products and services is influenced by businesses ability to finance that supply, the opportunity cost of that supply and the objectives of the business. If the price of a product increases businesses will naturally want to supply more given that all other factors remain unchanged.

When the laws of supply and demand are combined the law itself will determine the price that consumers will willingly spend whilst businesses will willingly sell. This is known as the equilibrium price. If the price is not at equilibrium there will either be excess supply or excess demand. The equilibrium price may naturally change if factors influencing consumer demand change.

The property market is restricted by several uncontrollable factors. The government limits the amount of space allowed to build on, and the places that can be built on. Space is in very short supply and demand for it is high. The changing nature of the demographics of the UK has emphasized further the housing shortage problem.

Generally today there are more single parents, more people living alone and generally more people in the UK. There was an increase of 1.8 million people in the UK between 1991 and 2002 (statistics.gov.uk). Interest rates are currently very low (4.25 per cent as at 13 May 2004) meaning mortgages are cheap to repay. Average UK house prices rose from 50,521 pounds in January 1996 to 145,918 pounds in April 2004 (Nationwide.co.uk). The rise in house prices has implications for the mortgage industry because it may prevent many first time buyers from being able to purchase property.

In Summary

The mortgage industry is greatly affected by inflation, monetary policy and the stock market. Many of these economic theories are, in practice, difficult for the mortgage industry as a whole to manage. However, the mortgage industry itself is also responsible for some of the affects of these theories. Many problems facing the mortgage industry are a product of a free market, and many economists take the view that to solve those problems the root must be dealt with rather than the problem itself. By leaving the economy to run itself to as great an extent as is possible the problems created may also be solved naturally.

At the same time it is of key importance that the people working in the mortgage industry have an acute understanding of economic theories and their application when handling large values of money belonging to customers. These theories must be used to accurately predict economic futures in order to safely handle money in the long-term. The mortgage industry is not only responsible for its customers; it is very influential in determining the condition of the economy as a whole.

References

Sloman, J: 2000. Economics. Harlow: Pearson Education Ltd.

National Statistics Online: 2004. Population Estimates. (Online Abstract)
Accessed: 13th May 2004.

Nationwide: 2004. House Prices Home Page. (Online Abstract) Note: MS Excel Document.
Accessed: 5th May, 2004.